* Shanghai rebar hits 1-1/2-week high, iron ore swaps firmer
* China economy on better footing, boosts demand outlook
* Iron ore to stay resilient at midpoint of $110-$143-Morgan
Stanley
(Adds Morgan Stanley outlook, updates rebar price)
By Manolo Serapio Jr
SINGAPORE, Aug 26 (Reuters) - Spot iron ore prices are
expected to bounce back to near five-month highs above $140 a
tonne this week, supported by likely brisk steel demand in top
consumer China.
Shanghai steel futures hit a 1-1/2-week high on Monday as
signs of a stabilising Chinese economy strengthened hopes for
steel consumption, which seasonally peaks in September and
October along with construction activity.
Benchmark 62-percent grade iron ore .IO62-CNI=SI rose 0.7
percent to $138.60 a tonne on Friday, according to data compiler
Steel Index.
The price of iron ore -- the biggest money spinner for top
miners Vale and Rio Tinto -- has
risen in seven of the past eight weeks as Chinese mills rebuilt
stockpiles to keep pace with brisk steel production.
Iron ore hit a high of $142.80 on Aug. 14, its loftiest
since mid-March.
"Demand from the mills is still quite healthy and iron ore
prices could go back up above $140," said a Shanghai-based
trader.
"We are looking to buy because our stocks are very close to
zero. In the short term, it seems difficult for prices to drop
so it's good to have some stocks and sell them quickly."
China's economy is showing clear signs of stabilisation,
helped by policy support and some improvement in global demand,
and is on track to meet the government's 2013 growth target of
7.5 percent, the state statistics bureau said.
A pickup in China's manufacturing activity to the fastest
pace in four months, based on data released last week, shows
Beijing's efforts to boost the economy may be paying off.
China has launched a series of measures to support the
economy, including scrapping taxes for small firms, offering
more help for ailing exporters and accelerating investment in
urban infrastructure and railways.
That is boosting the outlook for demand for commodities
including steel and iron ore, with prices recovering from
first-half declines when a slower Chinese economy curbed demand.
PRICES RESILIENT
"While we expect the iron ore price to drift lower from the
current level, we think it will remain resilient in the
mid-point of the current trading range of $110-$143," Morgan
Stanley analysts said in a report on Monday.
Prices may rise further beyond the third quarter if China
implements economic stimulus measures in addition to major
policy reforms, the report said.
The most-traded rebar contract for January delivery on the
Shanghai Futures Exchange hit a session high of 3,848
yuan ($630) a tonne, a level last seen on Aug. 14. It closed up
0.3 percent at 3,813 yuan.
Iron ore swaps <0#SGXIOS:> were also firmer, reflecting
expectations spot prices could scale higher.
The September contract traded at $137.50 and $138
a tonne in early deals on Monday after settling at $137.06 on
Friday, traders said. The October contract traded at
$135, up from Friday's $134.25.
Tighter credit access towards steel firms could pose a risk
going forward as Beijing curbs lending to sectors where there is
overcapacity, said the Shanghai trader.
"The problem doesn't look that serious at the moment, but
there's a potential risk which will affect steel demand," he
said.
China has around 300 million tonnes of surplus steel output
capacity, equivalent to nearly twice the output of the European
Union last year.
Shanghai rebar futures and iron ore indexes at 0701 GMT
Contract Last Change Pct Change
SHFE REBAR JAN4 3813 +10.00 +0.26
THE STEEL INDEX 62 PCT INDEX 138.6 +0.90 +0.65
METAL BULLETIN INDEX 139.27 +0.53 +0.38
Rebar in yuan/tonne
Index in dollars/tonne, show close for the previous trading day
($1 = 6.1210 Chinese yuan)
(Reporting by Manolo Serapio Jr.; Editing by Richard Pullin)

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